News

5 reasons why big groups are buying -- and dealers are selling

May 12, 2014

Jamie LaReau

Automotive News

It is a buyer's and a seller's market right now.

Such a rare occurrence has brokers predicting big buy-sell activity this year and for the next few years. The 2014 pace of dealership consolidation already is almost double that of 2013, says Tim Lamb, president of Tim Lamb Group, a buy-sell advisory firm in Ohio.

"The [mergers and acquisitions] business in automotive retail couldn't be any better right now," Lamb said.

Several elements are driving consolidation, but the key one is an unusual win-win market.

Most car brands are healthy, and dealership profits are good. That means dealers who sell out can command a premium.

At the same time, buyers project a good return on investment -- even with a relatively high purchase price -- because the long-term U.S. auto market is trending upward.

A favorable financing environment helps, as does the presence of big, cash-rich buyers. Lamb says he's seeing record transaction prices.

"The revelation has hit some guys that this good fortune may not last forever, so they're starting to come off the fence, making the determination to sell," he said.

Lamb expects consolidation to accelerate this year and even more during the next two or three years.

Key factors driving consolidation:

FANTASTIC FINANCING. Many banks are lending money at historically low interest rates. That makes it "a very attractive place for buyers to buy right now," says Brodie Cobb, founder of Presidio Group in San Francisco.

CASH PILES. Dealerships are emerging from the recession more profitable than ever.In 2013, the top 20 private dealership groups generated about $1 billion in cash after taxes, says Alan Haig, president of dealership buy-sell advisory firm Haig Partners in Fort Lauderdale, Fla. In 2013, he says, the public dealership groups earned $1.3 billion of after-tax cash from operations.The public groups are unlikely to spend that money on stock buybacks because of historically high stock prices, experts say. That leaves acquisitions as the best option.

JUST A JOB. For some dealers, the choice to sell has nothing to do with finances and everything to do with fun -- or the lack of it. They say that increasing manufacturer demands and rigorous government regulations are sapping their passion for the business.

SIZE MATTERS. Big dealership groups have advantages. National Automobile Dealers Association economist Steven Szakaly says they have cash and access to easy financing. And dealership groups enjoy financial efficiencies. For instance, larger groups can have a dedicated person who specializes in compliance with increasingly complex regulations.

NEW ENTRANTS. Haig and other brokers expect that investors from outside the industry -- wealthy families, private-equity players -- will be on the prowl to buy dealerships.